Everyone makes a new year’s resolution, be it losing a little weight or saving a few more dollars. Many of these fall through, but it’s important to stick to a financial plan, not just for a better today, but a better tomorrow as well.
“Without a plan, you don’t get anywhere,” said Rob Lutts, president and CIO of Cabot Wealth Management. “The key is to show over time where you’re going and for a lot of people, it’s a weight off their shoulders to sit down with someone and have a plan that they can stay true to.”
Saving for the future is even more paramount as people get older, especially as retirement savings dwindle.
According to recent data from Vanguard, the average 401(k) balance in 2015 was $96,288. That’s down from a peak of $102,682 in 2014.
As of 2014, the median age of the U.S. workforce was 41 years, 9 months, according to the U.S. Bureau of Labor Statistics. By 2024, that’s expected to be 42 years, 4 months. While that may not seem like a big jump, 23% of the U.S. workforce is expected to be 55 and older, nearly double what it was in 2000. This places a greater emphasis on having a financial plan and adhering to it, as people’s time in the workforce lessens.
Many investment strategists believe that future investment returns are likely to be less than the historical norm of 7%. With the U.S. worker aging and much more expected over the next decade and returns likely to be less than in the past, it’s important to make sure a financial plan is in order and it’s being adhered to.
1. Make yourself accountable.
In order to have a financial plan and plan for a better future, it’s important to hold yourself accountable, whether it’s to a spouse, a financial advisor or someone you trust.
“You need to have someone that can keep you on track and you answer to them,” Lutts said.
2. Write down goals.
Writing down a set of goals — whether saving for a new house or helping fund a loved one’s education — and an encompassing list of assets, worries and challenges will help make the goal easier to reach.
“I say if you want to do something, write it down and put it on the bathroom mirror so that you see it every morning,” Lutts added. “When you see it every day, you’ll be more likely to adhere to it.”
For many people, goals could be as simple as making their lives easier, but if it’s never written down, it’s more likely to be forgotten and scrapped.
3. Where are we now?
No matter how close retirement is (or isn’t), it’s still a good idea to see where you are on your journey and what you need to do in the future.
“Take a collection of all your assets and liabilities, what happened to you during the year that you didn’t expect, any significant changes and see how that affects your initial plan,” Lutts said.
Big life changes like marriage or divorce can affect someone’s financial well-being and ultimately cause the end goal to be altered, either positively or negatively. Luckily, there are some free tools you can use to help.
Many retirement advisory firms such as Chase, Vanguard, Fidelity and more offer retirement calculators. With these free tools, you can put in your income, your assets, your age and a host of other data to see how you’re stacking up towards your goal and whether it needs to be modified or tweaked.
4. Check risk tolerance and diversify.
As people get older, their risk tolerance tends to get more conservative. It’s important to keep your assets and investments in-line with your risk profile and whether that may alter your goals.
Historically, there’s been around a 6% return from bonds, but with inflation likely to rise significantly over the next few years, those returns could be cut in half, Lutts noted.
It’s also important that if certain investments have outperformed, it may be best to pare back some of these so they don’t overtake the portfolio and put some of the excess returns into other investments.
5. Check the fees.
Oftentimes, many investors don’t know what they’re being charged for for an investment, which can heavily impact future returns.
“It amazes me that there is often a lack of knowledge of what people are paying on their investments,” Lutts said, adding that some mutual funds offer high fees, but without the requisite performance.
Investors should look at mutual funds’ fee and see if they are around 0.75% or 1% and what their historical performance is. Many times, there are competitors who have done just as well, if not better, with lower fees.
6. Taxes, taxes, taxes.
Taxes are a component that often get overlooked but can have a huge impact on financial goals if they’re not properly managed.
If your tax situation has changed because you’re getting a large bonus, there are ways to mitigate that.
“Sometimes, it’s as simple as asking your boss to cut the check two weeks later, which can help you save a lot on your tax dollars,” Lutts said. “For our high-net worth clients, we consult with them on their taxes to see if they can harvest losses or offset gains. You might be better off selling one of your better-performing securities if you can move the money into other funds.”
7. Estate planning.
Setting up your estate is the ultimate end-goal and it can be a good way to see if goals need to be shifted.
“If you’re gifting assets, you may want to give that a good look over and see if you accomplished your goals or if they need to be tweaked,” Lutts said.
Source: The Street